Hydrogen: an expensive bomb or a multi-billion dollar opportunity?

Australia’s chief scientist Alan Finkel describes hydrogen as “Australia’s next multi-billion dollar export opportunity’’ – and judging from two recent equity raisings, investors are willing to back the future of the earth’s most abundant element as a clean energy source.

Creating clean-burning energy from water and oxygen sounds like fairyland stuff that would put a Greens manifesto to shame.

Indeed, hydrogen production requires a lot of energy to make, which renders the lightweight gas more of a fuel than an energy source itself.

The renewed excitement revolves around carbon abatement and hydrogen’s potential role as an energy storage and transport medium that’s lighter and more efficient than batteries.

“Hydrogen allows you to you take excess renewable energy, transport it and take it where it is needed,” says Hazer chief executive officer Geoff Ward.

Bank of America takes interest

Bank of America concurs, in a global research note: “The strong current interest is being driven by a fall in production costs, demand initiatives and targets set by countries like Japan and Korea; and expansion in the number of potential applications.”

Currently, the world produces a modest 115 million tonnes of hydrogen – 69Mt directly and 48Mt as a by-product of other processes.

The main uses are for production of ammonia (chemical code NH4) and fractionation in oil refining.

Without getting too Julian Sumner Miller-ish, 99% of hydrogen is produced by steam methane reforming, which requires coal or gas.

The process is costly and not exactly green.

Investor focus is on the alternative method of electrolysis, which involves liberating the hydrogen with electricity from renewable sources. The hydrogen can be made when the sun is shining, or the wind is blowing and transported to where it’s needed at any time.

According to Bank of America, hydrogen is unlikely to supplant lithium-ion batteries in most cars, but will come to the fore in “hard to abate” carbon-intensive sectors such as steel, cement, heavy trucks and chemicals.

The economics of electrolysis remain unappealing, with a current production costs of $6.50-$7.50 a kilogram, which are forecast to abate to $2-$3.50/kg by 2030.

The Global Hydrogen Council predicts hydrogen could supply 18% of the world’s energy by 2050 – but they would say that.

Meanwhile, seven larger companies are lining up for $70 million of grant funding for hydrogen funding, offered up by the Australian Renewable Energy Agency (ARENA).

The shortlisted companies are BHP Billiton Nickel West, APT Management Services, ATCO Australia, Australian Gas Networks Limited, Engie Renewables Australia, Macquarie Corporate Holdings and Woodside Energy.

Combined, the applicants are requesting $200 million for $500 million of projects.

Hazer Group

The only pure-play hydrogen stock on the ASX is Perth-based Hazer Group (ASX: HZR), which is commercialising its eponymous process that uses iron ore as a catalyst to produce hydrogen and useful graphite – rather than carbon dioxide – from methane.

Hazer last month completed an oversubscribed $8.4 million placement and secured a $6 million loan to fund a $15.8 million demo plant, at Perth’s Woodman Point wastewater treatment facility.

The Water Corporation provides the biogas feedback, while Hazer is working on a currently non-binding offtake deal with BOC Limited.

Hazer’s Mr Ward says the most common process involves heating natural gas (methane and ethane) to 1,100 degrees in the presence of steam. But for every tonne of hydrogen produced, 10-12t of carbon dioxide are emitted.

The Hazer process uses an iron ore catalyst to decompose methane into hydrogen molecules and solid graphitic carbon.

“We estimate we will get a 100-150t abatement credit for every tonne of hydrogen produced,” Mr Ward explained. “We think that will be a really valuable selling point for the early adopter market.”

The company soon expects to make a final investment decision on the 100t per annum pilot plant, in view of a full 2,500tpa commercial plant.

Struck at $0.42 a share and a 26% discount, the placement was increased from $6 million because of strong demand.

Leigh Creek Energy

Then there’s “grey” (fossil fuel derived) hydrogen – but with a twist.

Leigh Creek Energy (ASX: LCK) is furthering coal gasification at its eponymous location, 550 clicks from Adelaide.

Based on the remnants of an old coal mine, the deposit is said to be the biggest 2P (proven and probable) gas reserve in the country and management has been pondering how to monetise its value.

Urea (fertiliser) production is in the mix and the company reasons that if it can produce ammonia and urea (ammonia plus carbon dioxide) from its coal derived syngas, it can also produce hydrogen.

What’s more, it expects to produce the gas at a knockout price of $1/kg.

“Is hydrogen overhyped? It clearly isn’t, it’s just the start,” Leigh Creek chief executive officer Phil Staveley claims. “We are betting on [hydrogen] it as the next big thing.”

From an emissions perspective there’s little point in being “grey”, as the carbon emissions involved in converting the syngas to hydrogen will offset the benefits.

But the company will achieve carbon neutral status by capturing the carbon dioxide that’s surplus to urea production and injecting it back into the subterranean void created by the gasification.

Mr Staveley laments there’s a Catch 22 situation with the hydrogen market that would confound even Joseph Heller: without an end-use hydrogen production is stymied, while there’s no demand because there’s no commercial output.

“We are breaking that paradigm,” he declared.

Mr Staveley says Leigh Creek’s envisaged $1/kg production cost compared with the government’s “aspirational” $2/kg and current production costs of $4-$10/kg (depending on the method).

For the last three months, Leigh Creek has been proving up its gasification chops with one gasifier, but wants to expand this to multiple units over a longer period.

Beyond that, the company needs to decide on whether to pursue multi-billion dollar commitments to hydrogen or urea – or both.

Management also needs to convince the market that its project differs to the Queensland coal gasification programs that came to grief – notably Peter Bond’s Linc Energy.

However, investors are convinced enough to oversubscribe the company’s $1 million share purchase plan – struck at a 20% discount – by more than four-fold

Quite wisely, the board said “I’ll take your money” and accepted the full $4.1 million.